afaqs!

Import Burden

By Biprorshee Das and Anindita Sarkar , afaqs!, New Delhi | In Media | February 20, 2012
Many a business found it difficult to move swiftly as the dollar weighed the ship down.

When the global economy sneezes, the rupee catches a cold. It happened in 2008 and it wasn't different last year. When the Greek crisis hit Europe, Standard & Poor's (S&P) downgraded the country's sovereign rating to at lowest in the world in May. Three months later, S&P downgraded the US' rating for the first time ever. And the rupee started sliding faster.

Losing Team

Between August and December 2011, the Indian currency's downward spiral took it from 44 to dollar to 54 - a decline of almost 23 per cent. In fact, the Indian rupee was the worst performing currency in Asia in 2011.

Many sectors were hit. Along with automobiles, airlines, telecom and steel, print, television, animation, production houses and DTH players too felt the pinch. The bad news was worse for some than for others.

Facing it

The impact of the depreciating rupee varied across sectors. The print industry was perhaps one of the most affected. Already burdened by the increasing cost of domestic newsprint prices, the increase in dollar prices meant an additional load.

Shantanu Bhanja, vice-president, HT Media says, "It has been a lean quarter (October-December) for the industry, with costs rising across the board. Most of our newsprint for our English language dailies is imported and they are dollar denominated costs. An expensive dollar has meant those prices have gone up proportionately." Newsprint prices today are hovering around $800 (it was $625 in May, 2011 and averaged $580 in 2010) a tonne.

Shantanu Bhanja

Consider this example: A middle-rung daily with a print run of 5,00,000 copies would consume 168 tonnes of imported newsprint in a day. So a hike of Rs. 9 in the value of the dollar between August and December would mean that the newspaper would have to bear an additional cost of Rs. 9.5 lakh a day, which in a month translates to around Rs. 2.85 crore. On an average, English dailies import 70 per cent of their total newsprint requirement. Newspapers like The Hindu or Hindustan Times have print runs of 15 lakh copies approximately.

For regional language dailies, the import component of the newsprint is around 60 per cent of the total requirement. However, most language dailies' print run is way higher than the English dailies. For instance, a leading Hindi daily would have a print run of more than 30 lakh copies, although it would have fewer pages.

Sunil Mutreja

Sunil Mutreja, executive director, Amar Ujala says that domestic newsprint that has also become expensive does not help the cause either. "While imports did become more expensive, domestic newsprint prices rose in the first two quarters of 2011-12 by 6-7 per cent. Overall, our newsprint costs went up by around Rs. 45 crore. Considering the fact that circulation numbersthat have also risen, Amar Ujala was hit by a 10-12 per cent rise in newsprint costs (both imported and domestic newsprint)," says Mutreja. But with prices touching $800 a tonne, will the newspaper industry fall back on what it had to do four years ago � reduce pages, increase cover prices or delay new launches?

Snowed under

The television broadcasting industry too was in the line of fire. New channels and companies, in the process of buying equipment, lost much money. Most of the equipment in television is imported - starting from set top boxes, servers and playout systems to software like graphics.

Ashutosh

A DTH (direct to home) or multi system operator (MSO) would have been singed in the heat. Both buy set top boxes (STBs) in bulk (12-15 million a year on an average). A 10 per cent rise in cost meant a huge hit. And, in most of the cases, the increase is absorbed by the provider due to competition.

Television networks that were looking at expanding and buying new content - especially international - end up either bearing the loss or postponing plans, says a media pundit. "The situation became even more difficult for channels that buy imported software. However, for channels which are essentially foreign ones (like Disney), India becomes a cheaper market to operate in, with the same allocation of cost in the parent company's financials," says Ashutosh, COO, MyTV. MyTV is Cellcast Interactive India's social TV channel for India. Cellcast develops integrated participation content in the mobile and interactive TV market.

There are some who believe that the falling rupee will not have much effect on the television industry. "This is because local and foreign firms sign the pact well in advance. Moreover, we see a lot of negotiations that help us to balance the effect with the Indian rupee," says Monica Tata, general manager, Entertainment Networks, South Asia, Turner International India.

Steeper and Steeper

The fall of the rupee has had a significant impact on the content production process too, be it gaming, animation or the overall live-action industry. But it wasn't all bad news.

Paritosh Joshi

The animation and gaming industries almost overlap. And India is a leading provider (90 per cent of the $3 billion business is outsourced) of animation content to the US. Animation work on some big budget films like Lord of the Rings, the Harry Potter series, The Chronicles of Narnia, and Spiderman 3 was done in India. Those who billed in dollars, stood to benefit from the depreciating rupee. The gain was, however, also dependent on how the contract was framed. For instance, if a person sitting in India is charging $20 an hour as fees for his services, any fall in the rupee value will only increase his income. However, it has to be noted here that if the rupee strengthens, then the service provider stands to lose on the flat and fixed revenue.

Similarly, even within the gaming industry, where revenue is shared through licensing all across the world, a fall in the value of the rupee leads to a proportional increase in earnings. Meanwhile, the costs remain unaffected since the labour and software used are local and are, hence, billed in rupees.

Alok Kejriwal

"The guy who is paying you the dollars is not dumb either. He understands that if the service provider is already happy for less, there is no reason he should pay more. So, he often wants to reduce the purchase price. Hence, if one has sold his services on a flexible pricing or the prices are subject to negotiation on a regular basis, it is trouble," explains Alok Kejriwal, chief executive officer, Games2win.

Hedging is often resorted to as a safe bet. Take for instance an Indian brand that chooses to create animation for its television commercial abroad. The studio strikes a deal with a foreign animation company to create the ad film for Rs. 50 lakh and decides to sell it for Rs. 60 lakh to the brand, thereby earning a profit of Rs. 10 lakh.

The company goes to the bank and writes a contract, in which the former offers to pay a higher price to buy the hypothetical $100,000 at a price of Rs. 54 per dollar when the then current price is Rs. 53 per dollar for the next three months. However, there is a risk here too - the fear that if the dollar becomes Rs. 45, one will still have to pay Rs. 54.

Monica Tata

Meanwhile, if the production is live and the client wants the ad film to be shot abroad at a certain cost when the contract was signed, the sudden depreciation impacts the agency's margins.

Pass the cost

Sometimes, an established brand may be ready to bear the extra costs, but not every time. Therefore, either the location has to change or the agency has to take the hit. "We try to make the deal in rupees so that we know exactly what kind of money we have to pay. Even if it gets to be a little more expensive, we can evade the fluctuations," says a top creative executive on the condition of anonymity.

Says Roopak Saluja, co-founder and managing director, Bang Bang Films and Jack in the Box Worldwide, "Given that we work outside the country often enough, our input costs definitely went up. As the rupee plummeted rather rapidly, several ongoing projects were hit."

Later, as the rupee stabilised at the Rs. 52-53 to a dollar levels, we were able to pass the cost increase to the client. But, of course, that made us less competitive. Luckily, we do a lot of work for international clients," says Saluja.

Roopak Saluja

It was not all darkness for the television business. Analysts say that overseas subscriptions revenue went up sharply. But it has been a difficult year for syndicated channels, say industry professionals. With the dollar becoming dearer, the capital expenditure for networks, on an average, went up by around 15 per cent. The impact of the rising capex was felt more by newer networks than the established ones. Moreover, the race for broadcast channels to switch to high definition from standard definition will mean more expenditure.

However some say that international networks wouldn't worry too much about this. "While the proportion in India might have dipped, the same will have gone up abroad with its India earnings. The rupee revenue of established networks has been inflated without the channels having to do anything at all. It is almost like taking money out of the left pocket and putting it in the right," says Paritosh Joshi, chief executive officer, STAR CJ Alive.

There could be further concerns when money is invested in content, especially when the size of the screen is immaterial. TV, cinema, computers and the mobile will attract equal volumes of content supply. There is optimism, however, as industry experts see this as a short-term aberration. "Although the world at large continues to stare at economic uncertainty in the face, India remains cautiously optimistic but vulnerable to the risks associated with a slowing global economy," observes Turner's Tata.

All said and done, 2011 will be a difficult year to forget.

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